Pentagon cuts a mixed bag for defence firms

By Edd Gent

Published Tuesday, February 25, 2014

Pentagon spending cuts that will see the US Army shrink to pre-World War Two levels will have a major impact on key weapons programs.

Defence chiefs are attempting to absorb nearly a trillion dollars (£600bn) in reductions to projected spending over a decade. A two-year bipartisan budget deal in December eased some of the pressure on the department, but still cut its planned spending by $31bn in 2014 and another $45bn in 2015.

The Pentagon's budget for the 2015 fiscal year beginning in October is an estimated $496bn, about the same amount as the current fiscal year, but from 2016 the department's budget is slated to assume even larger spending cuts.

Defense Secretary Chuck Hagel said the cuts challenge the Pentagon to field a smaller yet well-trained force that could cope with any adversary, but this could jeopardize national security as it might not be able to respond simultaneously to multiple conflicts.

"We ... face the risk of uncertainty in a dynamic and increasingly dangerous security environment," Hagel said. "Budget reductions inevitably reduce the military's margin of error in dealing with these risks, as other powers are continuing to modernize their weapons portfolios."

Hagel said the Pentagon plans to reduce the size of the Army to between 440,000 and 450,000 soldiers from its current size of about 520,000 soldiers as well curb military and civilian personnel spending, including generous benefits, which now makes up about half its budget.

And, according to details released yesterday, changes to the Defense Department’s procurement plans could have a major impact on the defence sector, with both winners and losers, as some key programs are terminated, others slowed, and a few new ones started.

The Pentagon said it remained strongly committed to the Lockheed Martin F-35 fighter jet program, though Hagel did not provide details as to how many F-35 jets would be funded in the fiscal 2015 budget or over the next five years.

This is good news for Pratt & Whitney, which builds the jets engines, as well as Northrop Grumman and Britain's BAE Systems, which also provide significant components for the aircraft.

Hagel did say that if mandatory spending cuts remain in effect in fiscal 2016 and beyond, the Air Force would have to defer the purchase of 24 jets and the Navy would postpone procurement of the F-35 carrier variant for two years.

And the Pentagon has also decided to eliminate the Air Force fleet of A-10 ‘Warthog’ close air support planes, in order to ensure continued funding of the F-35 project and a new KC-46 aerial refueling tanker being built by Boeing.

The plans will not include funding for the Boeing's F/A-18 Super Hornets or EA-18G Growlers, with a senior US defence officials saying the F/A-18 remained a "very good airplane," but the F-35 offered the military additional electronic warfare capabilities.

Hagel said the Air Force would also retire its fleet of older U-2 spy planes, opting instead to maintain and modernize its fleet of Global Hawk unmanned spy planes built by Northrop.

He said the decision was "a close call," and marked a reversal of the position the department took in its fiscal 2014 budget proposal – a proposal ultimately overturned by Congress. He said Northrop had reduced the operating costs of the unmanned plane and its longer range and endurance made it a better platform for the future.

Pratt & Whitney and General Electric would get a boost from the Pentagon's decision to add $1bn in funding for work on new jet engine technology that will help protect the design teams of the main enginemakers.

The Pentagon's proposals would reduce the Navy’s Littoral Combat Ship (LCS) program from 52 to 32 ships, but it also calls for the Navy to submit proposals later this year for a more heavily armed surface warship, including the possibility of a new design and a modified version of the LCS ships. Lockheed and Australia's Austal build two different models of the current LCS ships.

In addition, Hagel said half of the Navy's cruiser fleet – or eleven ships – would be "laid up" and placed in reduced operating status while they are modernized and eventually returned to service with greater capability and a longer lifespan.

That could result in significant orders for General Dynamics and Huntington Ingalls Industries, which build and service ships, as well as BAE Systems, which also does much of the ships' maintenance work.

At the same time, Hagel said the Navy would continue to buy two destroyers and two attack submarines per year, orders that benefit General Dynamics and Huntington Ingalls, as well as one additional Afloat Staging Base built by a unit of General Dynamics.

If sequestration budget cuts remained in effect, the Navy would have to retire the USS George Washington aircraft carrier, skipping a mid-year refueling that would have been carried out by Huntington Ingalls and saving $6bn, Hagel said. He said the Navy would also have to slow the rate at which it bought new destroyers.

Hagel said the Army would cancel its Ground Combat Vehicle program, and focus instead on next-generation technology. That is a mixed bag for companies like General Dynamics and BAE Systems that have invested heavily in the current program. The new program would likely involve smaller funding amounts in coming years.